Overcoming late payments in Asia

Pickup in global growth remains on track, according to the International Monetary Fund’s (IMF) July outlook update, with global output projected to grow by 3.5% in 2017 and 3.6% in 2018. Despite the optimistic forecast, companies in Asia continue to have difficulties getting paid.

Overdue payment risks appear to be continuing to increase across the board, Coface found in its recent 2017 Asia Corporate Payment Survey, with 64% of the companies surveyed experiencing overdues and the average number of payment overdue days lengthening. The most noticeable deterioration of non-payment risk was in China, followed by Thailand and Australia. Moreover, considerably more respondents reported suffering from ultra-long-overdue amounts which exceeded 2% of their total annual turnover.

Confirming the difficulties companies face, Euler Hermes noted late last year that about 25% of companies worldwide were paid after more than 88 days. Late payments were particularly worrisome in China, where days sales outstanding (DSO) climbed to a nine-year high of 89 days.

Other countries in Asia with DSO well above the global average include India, at 67 days, and Japan, at 69 days. Those results came despite cash continuing to grow for Asia Pacific and even though one of the fastest increases in cash accumulation took place in China, with a 95% rise since 2010.

The question for many corporates, then, is how they can improve their payments situation, DSO and working capital despite the deterioration in payments. Fortunately, new solutions are increasingly becoming available.

One practice is to speed up invoicing. The longer it takes for a customer to receive an invoice, the longer it takes for them to make a payment. One of the biggest challenges that companies in Asia have is that they’re continuing to use manual processes for everything from invoicing to accounting.

The PWC Global Treasury Benchmark Survey 2017 found that companies in Asia use only about two treasury systems solutions, compared to nearly six in Western Europe, which PWC said suggests “a lot of work is still done manually and that their automation and tooling may not be as sophisticated.” By automating their billing processes, companies can reduce the time to send an invoice, which can reduce their DSO as well as late payments.

When invoices are sent, shortening credit terms can help as well. In Singapore, for instance, DP Information Group found that SMEs have tightened their credit terms and are getting paid 19 days earlier than just two years ago.

New supply chain finance (SCF) techniques can also help bridge the gap. When buyers have a bank provide financing that advances cash to the supplier at competitive rates, while allowing buyers to deepen a supply relationship, suppliers can benefit by taking up the financing. With payment terms averaging about 80 days in Asia compared to about 50 days globally, according to Vijay Vashist, DBS Bank global head of trade and supply chain finance, large companies that offer SCF services for their suppliers will help them tremendously.

Accepting corporate cards or wallets for B2B payments is a growing solution as well. While corporates have traditionally been reluctant to accept cards due to the cost, paying a merchant discount rate of about 2% or less in markets where the cost of funds is relatively high can help deliver payments faster and improve working capital.

One newer tool is solutions to evaluate buyer credit-worthiness. Coface found, for example, that only half of the companies checked and monitored buyer credit-worthiness. Fortunately, the process for checking credit is starting to become easier. Earlier this year, for instance, Alibaba launched a credit rating website in China called Cheng Xin that allows users to search for the name of a firm and gain access to the credit score of any company in the database. Alternative credit scoring firms, as well as crowdlending companies, are similarly leveraging new credit scoring models in other parts of Asia, which may soon enable corporates to check their counterparties’ creditworthiness.

Taking action to improve financials

While late payments are an increasing issue in certain markets in Asia, solutions to help resolve the challenges are at hand. Rather than simply sticking with existing practices, companies can benefit greatly and improve their finances by embracing these new solutions.

The payments landscape for corporates hasn’t gotten much clearer over the last decade, but global multi-banking continues to grow. Twenty-three per cent of corporates reportedly originate payments with 11 or more banks, and more than 24% operate within each of the major world regions.

The payments landscape for corporates hasn’t gotten much clearer over the last decade, but global multi-banking continues to grow. Twenty-three per cent of corporates reportedly originate payments with 11 or more banks, and more than 24% operate within each of the major world regions.